Will The New Bankruptcy Code a Game Changer for India Inc.?

Wed, 4 May Pre-Open

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Indiaplaza.com, initially named as Fabmall.com was founded by K. Vaitheeswaran in 1999. It was a smooth sail in the beginning, and then things started going downhill for the company. In October 2012, the company was burning cash and running out of working capital. It finally closed down in 2013 after failing to raise capital to stay afloat.

In a candid interview with a financial daily, the promoter recounted his horrors while trying to liquidate the firm.

This is not the story of just one company. Many others have witnessed the same fate.

The New Unified Bankruptcy code which has been cleared by the parliamentary panel after a four-month is a positive development indeed for India Inc. The banks which have been struggling with defaults to the tune of US$100 billion and promoters both stand to benefit from the new code.

The code applies to companies, partnerships, limited liability partnerships, individuals and any other body formed by the government. And here is what it proposes.

1. Faster debt recoveries and restructurings with 180 days' deadline
2. Setting up an Insolvency Regulator
3. The National Company Law tribunal would address grievances relating to companies while Debt recovery tribunals would deal with individual cases
4. Stiff Penalties for debtors who defraud

The code would ensure that the liquidation proceedings are swift and provide for an improved recovery rates for the creditors. India has a recovery rate of about 25.7 cents to the dollar. This rate is amongst the worst in the emerging economies.

The government has placed its top priority to clean-up of banks' bad debt. Its aggressive stance in implementing the new bankruptcy code will help create a formal insolvency resolution process and would help in speedy liquidation to help pay off the lenders and suppliers.

However, be forewarned that this is not an immediate solution. The implementation would take years to train up a new class of insolvency professionals and to compile debt records. It will be a tough journey in the short to medium term.

Its execution will remain a serious challenge with a backlog of over 70,000 liquidation cases. The World bank estimates that it typically takes four years to wind up an ailing company in India. As per data from the Reserve Bank of India, the backlog of unsettled cases in debt recovery tribunals has risen by 12 times over three years to US$57 billion (March 2015). In short, unified bankruptcy code is a welcome development, but it's too early to hail it as a game changer for India Inc.

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